The economic mess and structural problems in EU and USA – Part 2

This is the second part about USA. Again, It ain’t pretty to say the least!

Where the same absurd Alice in Wonderland economic and political farce is playing out in the USA. And as in Europe it is, as usual, the common people who are paying the price.

And as in Europe, the US crisis is anything but over regardless of what the political elites are trying to tell the people in USA. In USA the role of ECB is played by the FED (the Federal Reserve), which creates money out of “thin air” to support the gigantic and increasing debt. And to keep the stock market going and lower the price of the dollar.

So that the federal US government can spend your tax money like a drunken sailor.

In USA, Goldman Sachs and the other investment banks, plus the big Hedge Funds, are pushing leverage to ridiculous and dangerous extremes.

If you read the Comptroller of the Currency, Administrator of National Banks, report for the second quarter 2012 “Quarterly Report on Bank Trading and Derivatives Activities”, you get utterly horrified of the totals of the open derivatives positions in the US market.

Four of the largest U.S. banks are walking an extreme tightrope of risk, leverage and debt when it comes to derivatives. Below you are going to find just how utterly exposed they are.

But first what is leverage?

Most people do not understand “leverage” and what it actually means. If they did, they would not sleep at night knowing what’s going on right now.

To put it simple: leverage means that these banks etc use a leverage of say 1:50 or 1:100 in their speculations. Which means that they only put up 1 of their own dollars for an investment worth 50 or 100 dollar. Their dollars are “worth” 50 or 100 times more than they actually are.

It ALSO means that IF “things” goes wrong way they LOSE 50 or 100 dollars for every dollar they invested in that trade or position. Or much, much more.

And usually when things goes wrong, it goes very fast when it comes to trading with these kind of leverages. So very quickly, these sums get astronomical. In a couple of days they can literally lose ALL their capital and more.

This has happened time and time again. Just to mention a few:

- Lehman Brothers (was the 4th largest inv. bank in the US).

– Bear Stearns

– American International Group

– Northern Rock (a medium-sized British bank)

– Washington Mutual

– American Savings and Loan

– Landsbanki and Glitnir

– Barings Bank

– Société Générale

– JP Morgan Chase & Co

– Morgan Stanley

– Long-Term Capital Management L.P. (LTCM)

As I said before, this is JUST A VERY SHORT LIST

This would not per se be a problem if this were a truly free and capitalist market. Because then these banks would go bankrupt and the owners and investors would lose their money. As they are supposed to do if the do bad business or trades.

But as we all know,this is NOT a free and capitalist market. Our “dear” politicians have “decided” that these banks with all their wild speculations are too important or to big, to be allowed to fail.

So instead, they have used taxpayer’s money and put whole countries at risk and in extreme debt just to bail out these banks.

And the banks knows that whatever speculations they do, REGARDLESS of how much or bad they speculate, and as you can see below their speculations are horrific, the politicians are going to bail them out with our tax money.

JP Morgan Chase

Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)

Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)

Citibank

Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)

Bank Of America

Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $114,693,000,000 (a bit more than 114 billion dollars)

Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)

To sum up – TOTAL EXPOSURE TO DERIVATES for ONLY these four banks:

207, 375, 086, 000, 000 TRILLION DOLLARS!!!!!!!!!!!

TOTAL ASSETS for these four banks: 4,720,464,000,000TRILLION DOLLARS

So they can “cover” 2,27 % of the Total Exposure with ALL their Assets!

So who is going to pay for the “rest”: 202, 654, 622, 000, 000 TRILLION DOLLARS!!!!!!!!!!! if anything goes wrong?

Well, we know the answer to that doesn’t we. So far, it’s the common people, i.e. the taxpayers, who had to cover for all the banks bad speculations thanks to our dear politicians.

Take another look at those figures for Goldman Sachs. If you do the math, Goldman Sachs has total exposure to derivatives contracts that is more than 364 times greaterthan their total assets!

That is utter insanity, but everyone just keeps pretending that the emperor actually has clothes on.

And why are “our” politicians SO EAGER to protect these speculators?

To put these GIGANTIC sums into perspective lets compare with the GDP from USA and all of EU from 2011

There a lot of different way to calculate GDP and the figures for each year. Add to that exchange fluctuations, conversion rates etc. So the figures below comes from the same source (IMF) to make the comparison easier. And it is their conversion.

GDP USA 2011 – 15,094,025 billion US dollars

GDP EU 2011 – 17,610,826 billion US dollars

Total GDP for EU and USA 2011: 32,704,851 billion US dollars.

Lets compare these 32,704,851 billion US dollars with TOTAL EXPOSURE TO DERIVATES for these four above mentioned banks:

207, 375, 086, 000, 000 TRILLION DOLLARS!!!!!!!!!!!

VS

32,704,851 billion US dollars in COMBINED GDP of EU and USA

Anyone see any problem???

Problem solved all right. So just move on, nothing to notice here or worry about.

Because according to out “dear” politicians, bankers and political elites from EU and USA there is NO SERIOUS PROBLEM HERE. The problems in USA and EU are more or less solved etc.

So the ones that put as in the mess in the first place, very “reassuringly” tells us: “We take care of it”.

Yeah sure!

Let’s move on to another “bright spot” –the federal budget and debt. The figures are based on the 2012/2013 data:

2012 US Tax Revenue: $2,469,000,000,000

2012 Federal budget: $3,796,000,000,000

2012 Budget deficit: $1,327,000,000,000

US Federal Debt as of January 22, 2013: $16,471,084,067,491

Total interest paid on the debt in 2012: $359,796,008,919

Budget INCREASE between 2012 and 2013: $38,500,000,000

To make these gigantic sums understandable here is how these figures would look like for a “normal” family:

Annual family income: $24,690

Annual family expenses: $37,960. 154%of the annual family income.

Annual family shortfall borrowed from friends/neighbors etc: $13,270. 54%of the annual family income.

Total interest the family paid last year: $3,598 (at near 0% interest). Nearly 15% of the annual family income

Total family debt (mortgage, auto, credit card): $164,471.This is 666% of the annual family income.

Change in family spending this year: an increase of $385

This looks like a very responsible family wouldn’t you say?

And do you think this family would get any loans from the banks?

When you look at it this way, it really seems absurd. Yet it’s true… a slow motion train wreck. That any person with more than one functioning brain cell can see coming miles away. Except our “dear” politicians. They are in ACTUAL FACT increasing the spending AND the debt.

Here’s another way to look at the debt ceiling I found in a paper. It’s very symptomatic:

Let’s say you come home from work and find there has been a sewer backup in your neighborhood… and your home has sewage all the way up to your ceilings.

What do you think you should do?

Raise the ceilings, or remove the crap?

Well, or “dear” politicians are franticly at an increasing speed trying to raise the ceiling at the same time as the “sewage” is increasing EVEN MORE.

Yeap, there you have politicians in a nutshell.

Why fix the problem that they themselves caused, when the politicians can pretend that they are the giver of all gods and bearer of all gifts to all the people all the time.

And it doesn’t cost anything for anybody. It’s ALL free forever. And they all lived happily ever after.

7 svar to “The economic mess and structural problems in EU and USA – Part 2”

You should have in mind thou that without derivatives the world would not go around. It takes at least two to tango in this financial aspect presented by you. If something goes really wrong it is the parties that suffer more than ”the people” who was clever enough not to enter into such contracts, being it pure business or awkward speculations. The regulations get tougher and tougher against abuse as we need derivatives for all kind of business transactions in the world.

I recommend your readers the following to read plus more about derivatives on Wikipedia. As a complement to your excellent articles and your suggestive whistle blowing on the subject.

”A derivative is a term that refers to a wide variety of financial instruments whose values are derived from one or more underlying assets, market securities or indices. In practice, it is a contract between two parties that specifies conditions (especially the dates, resulting values and definitions of the underlying variables, the parties’ contractual obligations, and the notional amount) under which payments are to be made between the parties.[1][2] The most common underlying assets include: commodities, stocks, bonds, interest rates and currencies.”

Second, I don’t know were to start since sadly you are not very well informed regarding these matters. You have fallen for the version politicians want their people to believe so they don’t get too worried about what’s going on.

I could write 40 pages of facts of what’s going on, some of it would be very technical, but I concentrate on your belief that the regulations are working and are getting stronger (“The regulations get tougher and tougher”):

So here are just a few examples. And let’s start with accounting. Or as Larry Levin (longtime options trader and analyst) puts it:

“Behold the age of infinite moral hazard! On April 2nd, 2009 Congress forced FASB, to suspend rule 157 in favor of deceitful accounting for the TBTF banking mafia.”

“In 2008, when Lehman went bankrupt because of all the “toxic assets” on its balance sheet, the severe credit crisis that happened as a result was because everyone realized that Lehman was the canary in the coal mine. All of the American banking system was insolvent, for more or less the same reason: Assets on their books simply were not worth anything close to their nominal value. These assets were clustered around CDO’s, mostly in the real estate and commercial real estate markets.

To relieve the credit crunch that peaked in September, 2008, the Federal Reserve Board opened the money spigots—all kinds of lending windows were opened, with a dizzying array of acronyms, all of them doing basically the same thing: Lending out wads of cash at zero interest to the American banking system, all in an effort to keep it from going broke.

Between September, 2008, and March 2009, the Fed backstopped the entire US banking system—but it still wasn’t enough. The losses were too great, the holes in the balance sheets too big.

So on April 2, 2009, a key FASB rule was suspended: Specifically, rule 157 was suspended, related to the marking of assets to market value—the so-called “mark to market” rule.

Essentially, the mark-to-market rule means marking an asset to the value it can fetch in the open market at the date of the accounting period.If I own a share of XYZ stock which I purchased at $100, but today it’s quoted at $60, I mark it on my books at today’s market price—$60—not at the purchase price—$100. The reason is obvious: By marking the asset to market value, I’m giving a realistic picture of the financial shape of my company or bank.

However, ever since April 2, 2009, when the FASB rules were suspended, the American banking system has been floating on nothing by air. By suspending rule 157, none of the banks have had to admit that they’re insolvent. With the suspension of mark-to-market, accounting rules are now basically mark-to-make-believe. “

There you have your “regulations getting stronger and stronger”.

An other thing that most people don’t know – ALL Hedge Funds are totally UNREGULATED. Wall Street has stopped every attempt to regulate it through its willing people in Congress. And by the way – Wall street is the biggest donator and fundraisers to ALL important politicians on Capitol Hill regardless of party. They where also the biggest donors for Obama.

Another brilliant example of regulations “working” is the scandal that broke last week regarding the president of the European Central Bank, Mario Draghi, regarding massive cover up of derivate trades that gone horrible wrong at Siena’s Banca Monte dei Pasci, Italy’s third largest bank and the world’s oldest. when he was “supervising all Italian banks when he was the head of the Bank of Italy from 2006 to 2011.

“Former Economy Minister Giulio Tremonti said in a tweet that it was ”stupefying” that in his role as supervisor of Italy’s banking system Draghi had failed to discover or prevent the trades, which took place between 2006 and 2009.”

“Current Economy Minister Vittorio Grilli avoided mentioning Draghi directly but stressed that it was not the government but the central bank that was responsible for bank supervision.

”It wasn’t us that did the controlling,” he told reporters. ”On the checks, all I will say is that it is the responsibility of the Bank of Italy.”

And remember that this guy now is in control of ALL BANK regulations and ALL banks in EU.

As I wrote in my post:

“This would not per se be a problem if this were a truly free and capitalist market. Because then these banks would go bankrupt and the owners and investors would lose their money. As they are supposed to do if the do bad business or trades.

But as we all know, this is NOT a free and capitalist market. Our “dear” politicians have “decided” that these banks with all their wild speculations are too important or to big, to be allowed to fail.

So instead, they have used taxpayer’s money and put whole countries at risk and in extreme debt just to bail out these banks.

And the banks knows that whatever speculations they do, REGARDLESS of how much or bad they speculate, and as you can see below their speculations are horrific, the politicians are going to bail them out with our tax money.”

So what we now have thanks to our “dear” politicians is the following scenario without ANY accountability:

“How can broke economies lend money to other broke economies who haven’t got any money because they can’t pay back the money the broke economy lent to the other broke economy and shouldn’t have lent them in the first place because the broke economy cant pay it back”.

Even a 5 year old can understand this. But not “our” politicians and bankers.”

So here we have Goldman Sachs with Total Assets of a little bit more than 114 billion dollars. And Total Exposure To Derivatives: 41,6 trillion dollars

And as I wrote in my post:

“Take another look at those figures for Goldman Sachs. If you do the math, Goldman Sachs has total exposure to derivatives contracts that is more than 364 times greater than their total assets!

That is utter insanity, but everyone just keeps pretending that the emperor actually has clothes on.”

Another thing most people don’t know is that nearly ALL of this big trades are intrabank, between these banks themselves or with hedge funds.

So JP Morgan Chase, with a Total Exposure To Derivatives of 69,2 trillion dollars, have a lot of trades and open positions with Goldman Sachs with Total Exposure To Derivatives of 41,6 trillion dollars.

And remember as I said in my post: Total COMBINED GDP for EU and USA 2011- 32,7 trillion US dollars.

And you see no problem????

You should also watch British Tory politician, Daniel Hannan, at the Oxford Union Debate on Occupy Wall Street where he explores three myths of the recent financial meltdown in this video.

“The bailouts where an epical crime were low and medium income people were required to rescue some extremely wealthy bankers and bond holders from the consequences of their own error. It will one day be seen as a generational event. The government has now admitted that £ 60 Billion that taxpayers put up will never be reclaimed. In fact the total cost of the bailout was £ 1 trillion. We don’t know were it is now, we don’t know who got it, there has been no accounting.”

I admire your total commitment to the question about derivatives but in my opinion in many respects one sided approach to the whole problem. Not saying that that side of yours is wrong as presented.

It is in my opinion not the banks that have the enormous exposure it is the parties that use the system with help of what you and others describe now as an unregulated not capitalist market. Then regulate it and there is no problem. That is what you should focus on in my opinion but that is perhaps what you try do with your horrendous examples?.Not a word thou of accepting the value and necessity of having derivatives as something we have to live with.

I say it again, without derivatives in the world economy the world would not be such a good place to live in. That is my opinion. As I mentioned they cover more or the less all commerce in the world nowadays including also China. With all very bad examples of the past and present Was a communist country without derivatives a better place to live in? Your concern is to protect the ordinary citizens from bad politicians not from the banks I hope? The banks are not better than the politicians that regulate them. Or in your and others opinion not regulate them.

Al the money you and others you refer to say is paid by the taxpayers to the failing banks all around the world in all kinds of bail outs are somewhere, right? Even those you refer to say so. The main part of that bail out money is indirectly circulated among ordinary people also, not only among the crocks that you and others refer too. The later don´t sit on the money. They use them. That also goes for the banks that are bailed out. Many banks pay back for that matter. What the ordinary people who are not speculators lose in these governmental bail out transactions have in reality very little effect in their daily lives. In some cases, of course, the bail out is a blessing as it was in the USA in the housing market and the automobile industry for example. Bankrupt banks was not the solution as you and others probably would preferred to have seen? Bankrupt big banks will not be the solution the next time either. A next time will come. You know it, I know it, I prepare myself for it by not being in the hands of banks or ”derivatives” or taking unnecessary risks of greedy speculations. Your way of discussing means that someone else than you should take full responsibility for your future? Your politicians, your leaders or law and regulations? Fine, the better then, if it works. But, you and your family have finally the full responsibility at the end, not the banks or derivatives speculators..

It´s the lack of ability from the politicians to direct reforms towards solving unemployment, boosting investment in industry and business, implementing social reforms that is the real problem. Not the derivatives exchange as such – how senseless they might seem – between willing contractual partners.Don’t forget that governments often are the worst misuser’s of derivatives.

Yes, let the banks go bankrupt, but as I say, ordinary people would not benefit from that. That’s why I again say that regulations are under way as a result of what has been going on and what seems to be ahead of the world of derivatives and banking transactions.

I don´t see the utterly terrible problem that you and others see. Other than with the politicians. People like to speculate and they will continue to do so with or without the help of bankers. They speculate buying and selling their homes without having savings, lending money at the best rates from friends or banks or other institutions. They buy goods were it’s cheapest and best putting many out of business. Now and then we will have bubbles of all kinds and those who can think and plan will suffer the least. Money is a commodity in itself. Human beings have their weakness.

The global warming scandal where governments and other opportunist tax the people to their knees that is something that is of more importance than even a sick derivatives business now and then. In the global warming question and the bluff with the importance with co2 in this context I am all with you and your crusading thou. Keep up that good work.

Thank you for a good debate. I like your site as a good base for thought even if I do not always share your ideas or the way you present them. Sometimes I do, thou!

Just a short comment on that regulations are “working” and that they are “getting tougher”

To find out what a joke these so-called regulations are you just have to read as one more example The Project On Government Oversight (POGO) latest report were they investigated the main regulator SEC. And here is what they found:

“Overview

A revolving door blurs the lines between one of the nation’s most important regulatory agencies and the interests it regulates. Former employees of the Securities and Exchange Commission (SEC) routinely help corporations try to influence SEC rulemaking, counter the agency’s investigations of suspected wrongdoing, soften the blow of SEC enforcement actions, block shareholder proposals, and win exemptions from federal law. POGO’s report examines many manifestations of the revolving door, analyzes how the revolving door can influence the SEC, and explores how to mitigate the most harmful effects.”

A revolving door blurs the lines between one of the nation’s most important regulatory agencies and the interests it regulates.

Former employees of the Securities and Exchange Commission (SEC) routinely help corporations try to influence SEC rulemaking, counter the agency’s investigations of suspected wrongdoing, soften the blow of SEC enforcement actions, block shareholder proposals, and win exemptions from federal law.

The revolving door was on display in 2012 when the investment industry opposed one of the top priorities of the SEC chairman, a plan to tighten regulation of money market funds. Former SEC employees lobbied to block the plan, and an SEC Commissioner who previously worked for an investment firm played a pivotal role in derailing it.

The movement of people to and from the financial industry is a key feature of the SEC, and it has the potential to influence the agency’s culture and values. It matters because the SEC has the power to affect investors, financial markets, and the economy.

Yet, the SEC has exempted certain senior employees from a “cooling off period” that would have restricted their ability to leave the SEC and then represent clients before the agency. In addition, the SEC has shielded some former employees from public scrutiny by blacking out their names in documents they must file when they go through the revolving door.

The SEC is a microcosm of the federal government, where widespread revolving expands the opportunities for private interests to sway public policy.

One academic study suggested that concerns about the SEC’s revolving door are misguided. But the academics looked at only a sliver of the SEC’s work. They did not examine, for instance, how the revolving door affects the SEC’s regulation of Wall Street, its granting of relief to specific companies, its handling of cases related to the financial crisis, or its decisions to drop investigations without bringing charges. The study sought to quantify any influence the revolving door might have on SEC enforcement actions, but the subtleties involved do not lend themselves to such simple measurement.

This report, the Project On Government Oversight’s (POGO) second on the SEC, is based in part on interviews with current and former SEC officials and thousands of federal records obtained through the Freedom of Information Act.

POGO found that, from 2001 through 2010, more than 400 SEC alumni filed almost 2,000 disclosure forms saying they planned to represent an employer or client before the agency. Those disclosures are just the tip of the iceberg, because former SEC employees are required to file them only during the first two years after they leave the agency.

POGO’s report examines many manifestations of the revolving door, analyzes how the revolving door has influenced the SEC, and explores how to mitigate the most harmful effects.”

“Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.”

A few Swedish journalists have finally opened their eyes to what great risk these wild speculations from banks put their countries in.

The owners of the banks put up around 4% of the capital of the total assets. The rest, 96%, is debt. And this debt is “guarantied”, thanks by our “dear” politicians, by us the taxpayers. So the banks put up 4% of the total assets, receive ALL the profit and the taxpayers take ALL the risks.

Sound like a very lucrative business.

On top of that, more than half of the profit for the banks is because the central bank has guarantied their loans at very, very low rent. That is according to the central banks own report.

Yeap, I think I will start several banks. I think we all should. It seems the only guarantied way to earn money regardless of how stupid and wrong speculations you do. And you never ever have to pay the price.